Centerplate (CVP) 10-Q 2007 Q2 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

þ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the quarterly period ended July 3, 2007 or

o Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                    to                    

Commission file number:001-31904

CENTERPLATE, INC.

(Exact name of registrant as specified in its charter)

Delaware	13-3870167
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
2187 Atlantic Street, Stamford, Connecticut, 06902	(203) 975-5900
(Address of principal executive offices, including zip code)	(Registrant’s telephone number, including area code)

http:www.centerplate.com
(Registrant’s URL)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

þ Yes     o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer (see definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act).

o Large accelerated filer     þ Accelerated filer     o Non-accelerated filer

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes      þ No

APPLICABLE ONLY TO CORPORATE ISSUERS:

The number of shares of common stock of Centerplate, Inc. outstanding as of August 10, 2007 was 22,524,992.

CENTERPLATE, INC.

INDEX

PART I — FINANCIAL INFORMATION	2
Item 1. Financial Statements (unaudited)	2
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3. Quantitative and Qualitative Disclosures About Market Risk	26
Item 4. Controls and Procedures	27
PART II — OTHER INFORMATION	28
Item 1. Legal Proceedings	28
Item 1A. Risk Factors	28
Item 4. Submision of Matters to a Vote of Securities Holders	28
Item 6. Exhibits	29
EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-32.1: CERTIFICATION
EX-32.2: CERTIFICATION

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PART I
FINANCIAL INFORMATION

CENTERPLATE, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
JULY 3, 2007 AND JANUARY 2, 2007

	July 3,			January 2,
	2007			2007
	(In thousands, except share data)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	34,413		$	39,591
Restricted cash		12,231			13,080
Accounts receivable, less allowance for doubtful accounts of $1,002 and $1,013 at July 3, 2007 and January 2, 2007, respectively		28,109			23,172
Merchandise inventories		24,868			19,347
Prepaid expenses and other		4,010			3,865
Deferred tax assets		4,802			3,139
Total current assets		108,433			102,194
PROPERTY AND EQUIPMENT:
Leasehold improvements		41,855			41,770
Merchandising equipment		78,461			71,043
Vehicles and other equipment		17,848			17,350
Construction in process		1,989			1,708
Total		140,153			131,871
Less accumulated depreciation and amortization		(87,513	)		(81,187	)
Property and equipment, net		52,640			50,684
OTHER LONG-TERM ASSETS:
Contract rights, net		78,479			79,209
Restricted cash		9,273			9,041
Cost in excess of net assets acquired		41,142			41,142
Deferred financing costs, net		11,646			12,930
Trademarks		17,523			17,523
Deferred tax assets		16,355			14,612
Other		4,846			5,035
Total other long-term assets		179,264			179,492
TOTAL ASSETS	$	340,337		$	332,370

See notes to consolidated condensed financial statements.

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CENTERPLATE, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS (CONTINUED)(UNAUDITED)
JULY 3, 2007 AND JANUARY 2, 2007

	July 3,			January 2,
	2007			2007
	(In thousands, except share data)
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Current portion of long-term debt	$	1,075		$	1,075
Short-term borrowings		12,500			15,000
Accounts payable		26,959			21,710
Accrued salaries and vacations		15,326			15,437
Liability for insurance		4,701			4,975
Accrued taxes, including income taxes		6,189			5,307
Accrued commissions and royalties		40,514			23,458
Liability for derivatives		1,369			1,251
Accrued interest		1,028			1,020
Accrued dividends		1,487			1,487
Advance deposits		6,601			3,662
Other		3,779			4,318
Total current liabilities		121,528			98,700
LONG-TERM LIABILITIES:
Long-term debt		209,251			209,789
Liability for insurance		8,195			7,744
Other liabilities		358			535
Total long-term liabilities		217,804			218,068
COMMITMENTS AND CONTINGENCIES
COMMON STOCK WITH CONVERSION OPTION, PAR VALUE $0.01, EXCHANGEABLE FOR SUBORDINATED DEBT, NET OF DISCOUNT		14,352			14,352
STOCKHOLDERS’ EQUITY (DEFICIENCY):
Common stock, $0.01 par value — authorized: 100,000,000 shares;
issued: 18,463,995 shares without conversion option; outstanding:
18,463,995 shares without conversion option		185			185
issued: 21,531,152 shares with conversion option; outstanding:
4,060,997 shares with conversion option		215			215
Additional paid-in capital		218,331			218,331
Accumulated deficit		(112,589	)		(97,282	)
Accumulated other comprehensive income		1,451			741
Treasury stock — at cost (17,470,153 shares)		(120,940	)		(120,940	)
Total stockholders’ equity (deficiency)		(13,347	)		1,250
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIENCY)	$	340,337		$	332,370

See notes to consolidated condensed financial statements.

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CENTERPLATE, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
THIRTEEN AND TWENTY-SIX WEEK PERIODS ENDED JULY 3, 2007 AND JULY 4, 2006

	Thirteen Weeks Ended						Twenty-six Weeks Ended
	July 3,			July 4,			July 3,			July 4,
	2007			2006			2007			2006
	(In thousands, except for share data)
Net sales	$	200,839		$	190,699		$	326,172		$	304,204
Cost of sales (excluding depreciation & amortization)		162,948			154,174			269,206			249,834
Selling, general, and administrative		20,161			17,413			37,361			32,096
Depreciation and amortization		7,713			7,074			15,095			14,125
Transaction related expenses		333			—			333			—
Contract related losses		—			—			—			100
Operating income		9,684			12,038			4,177			8,049
Interest expense		7,079			6,207			15,131			12,746
Other income		(542	)		(341	)		(1,044	)		(663	)
Income (loss) before income taxes		3,147			6,172			(9,910	)		(4,034	)
Income tax provision (benefit)		907			6,238			(4,102	)		1,630
Net income (loss)	$	2,240		$	(66	)	$	(5,808	)	$	(5,664	)
Basic and diluted net income (loss) per share with and without conversion option	$	0.10		$	(0.00	)	$	(0.26	)	$	(0.25	)
Weighted average shares outstanding with conversion option		4,060,997			4,060,997			4,060,997			4,060,997
Weighted average shares outstanding without conversion option		18,463,995			18,463,995			18,463,995			18,463,995
Total weighted average shares outstanding		22,524,992			22,524,992			22,524,992			22,524,992
Dividends declared per share	$	0.20		$	0.20		$	0.40		$	0.40

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CENTERPLATE, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIENCY) AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
FOR THE PERIOD FROM JANUARY 2, 2007 TO JULY 3, 2007 AND THE THIRTEEN AND TWENTY-SIX WEEKS ENDED JULY 3, 2007 AND JULY 4, 2006

	Common		Common		Common		Common
	Shares		Stock		Shares		Stock							Accumulated
	without		without		with		with		Additional					Other
	Conversion		Conversion		Conversion		Conversion		Paid-in		Accumulated			Comprehensive		Treasury
	Option		Option		Option		Option		Capital		Deficit			Income		Stock			Total
	(In thousands, except share data)
BALANCE, JANUARY 2, 2007		18,463,995	$	185		21,531,152	$	215	$	218,331	$	(97,282	)	$	741	$	(120,940	)	$	1,250
Foreign currency translation		—		—		—		—		—		—			710		—			710
Dividends declared		—		—		—		—		—		(8,920	)		—		—			(8,920	)
FIN 48 transition amount		—		—		—		—		—		(579	)		—		—			(579	)
Net loss		—		—		—		—		—		(5,808	)		—		—			(5,808	)
BALANCE, JULY 3, 2007		18,463,995	$	185		21,531,152	$	215	$	218,331	$	(112,589	)	$	1,451	$	(120,940	)	$	(13,347	)

	Thirteen Weeks Ended					Twenty-six Weeks Ended
	July 3,		July 4,			July 3,			July 4,
	2007		2006			2007			2006
Net income (loss)	$	2,240	$	(66	)	$	(5,808	)	$	(5,664	)
Other comprehensive income - foreign currency translation adjustment		636		308			710			313
Comprehensive income (loss)	$	2,876	$	242		$	(5,098	)	$	(5,351	)

See notes to consolidated condensed financial statements.

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CENTERPLATE, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
TWENTY-SIX WEEKS ENDED JULY 3, 2007 AND JULY 4, 2006

	Twenty-six Weeks Ended
	July 3,			July 4,
	2007			2006
	(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(5,808	)	$	(5,664	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		15,095			14,125
Amortization of deferred financing costs		1,284			1,285
Charge for impaired assets		—			100
Non-cash interest earned on restricted cash		(232	)		(198	)
Change in fair value of derivative		118			(932	)
Deferred tax benefit		(3,985	)		1,515
Gain on disposition of assets		(26	)		(31	)
Other		710			313
(Increase)/decrease in assets and liabilities:
Accounts receivable		(4,884	)		(1,649	)
Merchandise inventories		(5,521	)		(3,682	)
Prepaid expenses		(145	)		(1,472	)
Other assets		(167	)		(1,735	)
Accounts payable		3,219			5,055
Accrued salaries and vacations		(111	)		3,444
Liability for insurance		177			(432	)
Accrued commissions and royalties		13,888			16,680
Other liabilities		3,113			4,366
Net cash provided by operating activities		16,725			31,088
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment		(8,110	)		(4,833	)
Proceeds from sale of property and equipment		17			165
Contract rights acquired		(4,043	)		(6,818	)
Restricted cash		849			—
Return on unamortized capital investment		—			1,828
Net cash used in investing activities		(11,287	)		(9,658	)

See notes to consolidated condensed financial statements.

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CENTERPLATE, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(CONTINUED)(UNAUDITED)
TWENTY-SIX WEEK PERIODS ENDED JULY 3, 2007 AND JULY 4, 2006

	Twenty-six Weeks Ended
	July 3,			July 4,
	2007			2006
	(In thousands)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments — revolving loans	$	(41,000	)	$	(5,000	)
Borrowings — revolving loans		38,500			5,000
Principal payments on long-term debt		(538	)		(538	)
Dividend payments		(8,920	)		(8,920	)
Increase in bank overdrafts		1,342			1,716
Net cash used in financing activities		(10,616	)		(7,742	)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS:		(5,178	)		13,688
CASH AND CASH EQUIVALENTS:
Beginning of period		39,591			41,410
End of period	$	34,413		$	55,098
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid	$	13,721		$	12,034
Income taxes paid	$	452		$	173
SUPPLEMENTAL NON CASH FLOW INVESTING AND FINANCING ACTIVITIES:
Capital investment commitment accrued	$	5,909		$	979
Dividends declared and unpaid	$	1,487		$	1,487

See notes to consolidated condensed financial statements.

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CENTERPLATE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
TWENTY-SIX WEEK PERIODS ENDED JULY 3, 2007 AND JULY 4, 2006

1. GENERAL

     Centerplate, Inc. (“Centerplate” and together with its subsidiaries, the “Company”) is a holding company, the principal assets of which are the capital stock of its subsidiary, Volume Services America, Inc. (“Volume Services America”). Volume Services America is also a holding company, the principal assets of which are the capital stock of its subsidiaries, Volume Services, Inc. (“Volume Services”) and Service America Corporation (“Service America”).

     The accompanying financial statements of Centerplate have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission for interim financial reporting. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete annual financial statements. However, such information reflects all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of results for the interim periods.

     The results of operations for the 26 week period ended July 3, 2007 are not necessarily indicative of the results to be expected for the 52 week fiscal year ending January 1, 2008 due to the seasonal aspects of the business. The accompanying consolidated condensed financial statements and notes thereto should be read in conjunction with the audited financial statements and notes thereto for the year ended January 2, 2007 included in the Company’s annual report on Form 10-K.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     There have not been any changes in our significant accounting policies from those disclosed in the Company’s annual report for fiscal year 2006 on Form 10-K for the fiscal year ended January 2, 2007, except for the adoption of FIN 48 described below.

     Cost in Excess of Net Assets Acquired and Trademarks –The Company performed its annual impairment tests of goodwill and trademarks as of April 3, 2007 in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142,Goodwill and Other Intangible Assets, and determined that no impairment existed. There have been no events since April 3, 2007 that would cause the Company to have to reassess the carrying value of these assets.

     Insurance– The Company has a high deductible insurance program for general liability, auto liability, and workers’ compensation risk and self-insures its employee health plans. Management establishes a reserve for the high deductible and self-insurance liabilities considering a number of factors, including historical experience and an actuarial assessment of the liabilities for reported claims and claims incurred but not reported. The estimated liabilities for these programs, except for employee health insurance, are then discounted using rates of 5.0% and 4.75% at July 3, 2007 and January 2, 2007, respectively, to their present value based on expected loss payment patterns determined by experience. The total discounted high deductible liabilities recorded by the Company at July 3, 2007 and January 2, 2007 were $11,695,000 and $11,100,000, respectively. The related undiscounted amounts were $13,503,000 and $12,718,000, respectively.

     The employee health self-insurance liability is based on claims filed and estimates for claims incurred but not reported. The total liability recorded by the Company at July 3, 2007 and January 2, 2007 was $986,000 and $1,432,000, respectively.

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     Accounting Treatment for IDSs, Common Stock Owned by Initial Equity Investors and Derivative Financial Instruments— The Company’s Income Deposit Securities (“IDSs”) include common stock and subordinated notes, the latter of which has three embedded derivative features. The embedded derivative features include a call option, a change of control put option, and a term-extending option on the notes. The call option allows the Company to repay the principal amount of the subordinated notes after the fifth anniversary of the issuance, provided that the Company also pays all of the interest that would have been paid during the initial 10-year term of the notes, discounted to the date of repayment at a risk-free rate. Under the change of control put option, the holders have the right to cause the Company to repay the subordinated notes at 101% of face value upon a change of control, as defined in the subordinated note agreement. The term-extending option allows the Company to unilaterally extend the term of the subordinated notes for two five-year periods at the end of the initial 10-year period provided that it is in compliance with the requirements of the indenture. The Company has accounted for these embedded derivatives in accordance with SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities, as amended and interpreted. Based on SFAS No. 133, as amended and interpreted, the call option and the change of control put option are required to be separately valued. As of July 3, 2007 and January 2, 2007, the fair value of these embedded derivatives was determined to be insignificant. The term extending option was determined to be inseparable from the underlying subordinated notes. Accordingly, it will not be separately accounted for in the current or future periods.

     In connection with the Initial Public Offering (“IPO”) in December 2003, those investors who held stock prior to the IPO (the “Initial Equity Investors”) entered into the Amended Stockholders Agreement on December 10, 2003 with the Company, which provides that, upon any post-offering sale of common stock by the Initial Equity Investors, at the option of the Initial Equity Investors, the Company will exchange a portion of its common stock for subordinated notes at an exchange rate of $9.30 principal amount of subordinated notes for each share of common stock (so that, after such exchange, the Initial Equity Investors will have shares of common stock and subordinated notes in the appropriate proportions to represent integral numbers of IDSs). In order to determine the number of shares of common stock that the Initial Equity Investors could convert into subordinated debt, the Company divided the exchange rate of $9.30 by the original issue price of the IDSs of $15.00 at December 4, 2003 (the quotient equals 0.62). This quotient was then multiplied by the total number of shares owned by the Initial Equity Investors (4,060,997 shares) to determine the number of IDSs that the Initial Equity Investors would own after conversion (2,517,817 IDSs, each comprised of one share of stock and a subordinated note). The number of shares owned by the Initial Equity Investors before conversion (4,060,997) was subtracted from the number of shares they would own after conversion (2,517,817) to determine the number of shares of common stock to be converted into subordinated debt (1,543,180 shares) at the exchange rate of $9.30 per share resulting in approximately $14.4 million described further below.

     The Company has concluded that the portion of the Initial Equity Investor’s common stock exchangeable for subordinated debt as calculated above should be classified on its consolidated balance sheet according to the guidance provided by Accounting Series Release No. 268 (FRR Section 211),“Redeemable Preferred Stocks”.Accordingly, at both July 3, 2007 and January 2, 2007, the Company has recorded approximately $14.4 million as “Common stock with conversion option exchangeable for subordinated debt” on the balance sheet. In addition, the Company has determined that the option conveyed to the Initial Equity Investors to exchange common stock for subordinated debt in order to form IDSs is an embedded derivative in accordance with Paragraph 12 of SFAS No. 133. The Company has recorded a liability for the fair value of this embedded derivative of approximately $1.5 million as of July 3, 2007, an increase of $0.1 million from January 2, 2007. This option will continue to be recorded at fair value each reporting period with the change in the fair value recorded in interest expense in the accompanying consolidated statements of operations until such option is exercised.

     Upon any actual exchange of common stock for subordinated debt, the carrying value of “Common stock with conversion option exchangeable for subordinated debt” and the fair value of the derivative associated with the exchange right will be eliminated and the newly issued senior subordinated notes will be recorded at fair value. Upon conversion, interest on the subordinated notes will be payable at 13.5% per annum, resulting in additional interest expense of approximately $1,937,500 annually. Any difference between the fair value of the subordinated notes and their par value at issuance will be recorded as premium or discount and amortized as an adjustment to interest expense in our consolidated statements of operations through maturity of the subordinated notes.

     The common stock held by the Initial Equity Investors was initially treated as a separate class of common stock for presentation of earnings per share. Although the common stock held by the Initial Equity Investors is part of the same class of stock as the common stock included in the IDSs for purposes

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of Delaware corporate law, the right to convert that is granted in the Company’s Amended and Restated Stockholders Agreement as described above causes the stock held by the Initial Equity Investors to have features of a separate class of stock for accounting purposes. At July 3, 2007 and July 4, 2006, earnings per share for common stock with and without conversion rights were equal and therefore no separate presentation was required.

     Income Taxes– The provision (benefit) for income taxes includes federal, state and foreign taxes currently payable, and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. A valuation allowance is established for deferred tax assets when it is more likely than not that the benefits of such assets will not be realized.

     Income taxes for the 26 weeks ended July 3, 2007 and July 4, 2006 were calculated using the projected annual effective tax rate for fiscal 2007 and 2006, respectively, in accordance with SFAS No. 109 “Accounting for Income Taxes” and APB No. 28Interim Financial Reporting. Currently, the Company estimates that in the fiscal year ending January 1, 2008, it will have an effective annual tax rate of approximately
-43%. In determining the effective annual tax rate, the Company’s book income, permanent tax adjustments, and tax credits have been factored into the calculation. In the prior year period, the Company estimated that its effective annual tax rate for the fiscal year ended January 2, 2007 would be -40%. The fluctuation in the projected effective annual tax rate is primarily due to the sensitivity of the ratio involving expected ordinary income and permanent items, primarily the non-cash interest charge related to the Company’s derivatives which is a permanent adjustment (as it increases the effective tax rate decreases). The interim income tax provision (or benefit) can fluctuate considerably from quarter to quarter as a result of changes in the projected effective annual tax rate. For the 26 weeks ended July 3, 2007, the projected effective annual tax rate of -43% was not utilized to record the Company’s tax benefit for the periods, due to the limitation applicable pursuant to the guidance provided by FIN 18,Accounting for Income Taxes In Interim Periods(an interpretation of APB No. 28).

     In July 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48,Accounting for Uncertainty in Income Taxes(“FIN 48”), an interpretation of the Statement No. 109,Accounting for Income Taxes. FIN 48 requires that a position taken or expected to be taken in a tax return be recognized in the financial statements when it is more likely than not (i.e. a likelihood of more than fifty percent) that the position would be sustained upon examination by tax authorities. A recognized tax position is then measured at the largest amount of benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. FIN 48 also requires expanded disclosures including identification of tax positions for which it is reasonably possible that total amounts of unrecognized tax benefits will significantly change in the next twelve months, a description of tax years that remain subject to examination by major tax jurisdiction, a tabular reconciliation of the total amount of unrecognized tax benefits at the beginning and end of each annual reporting period, the total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate and the total amounts of interest and penalties recognized in the statements of operations and financial position. FIN 48 was effective for public companies for fiscal years beginning after December 15, 2006.

     The Company adopted the provisions of FIN 48 on January 3, 2007. As a result of the implementation of FIN 48, the Company recognized approximately a $579,000 increase in the liability for unrecognized tax benefits, which was accounted for as a reduction to the January 3, 2007, balance of retained earnings. As of January 3, 2007, the Company had approximately $2.1 million of total gross unrecognized tax benefits. Of this total, approximately $1.0 million (net of the federal benefit on state issues) represents the amount of unrecognized tax benefits that, if recognized, would affect the annual effective tax rate. There have been no significant changes to these amounts during the quarter ended July 3, 2007. The Company does not expect that the total amounts of unrecognized tax benefits will significantly increase or decrease within the next 12 months.

     The Company accounted for its issuance of IDS units in December 2003 by allocating the

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proceeds for each IDS unit to the underlying stock and subordinated notes based upon the relative fair values of each at that time. Accordingly, the portion of the aggregate IDSs outstanding that represents subordinated notes has been accounted for by the Company as long-term debt bearing a stated interest rate of 13.5% maturing on December 10, 2013. During the 26 weeks ended July 3, 2007, the Company deducted interest expense of approximately $7.1 million on the subordinated notes from taxable income for U.S. federal and state income tax purposes. Although to date, the Company has not been notified that the notes should be treated as equity rather than debt for U.S. federal and state income tax purposes, there can be no assurances that the Internal Revenue Service or the courts will not seek to challenge the treatment of these notes as debt or the amount of interest expense deducted. If the notes were to be treated as equity for income tax purposes, interest expense associated with the notes would not be deductible from taxable income. There would be no additional tax due to the federal and state authorities for the 26 week period ending July 3, 2007 as a result of the Company’s second quarter results. Since issuance of the IDS units in December 2003, the cumulative amount of interest expense associated with the notes is approximately $50.7 million and the additional tax due to the federal and state authorities, would be approximately $6.0 million based on the Company’s ability to utilize net operating losses and tax credits to offset a portion of the tax liability. The Company believes the interest on the subordinated notes should be deductible for federal and state income taxes and, as such, has not recorded a liability for the potential disallowance of this deduction.

     The Company is subject to U.S and Canadian income taxes, as well as various other state and local jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2003, although carryforward attributes that were generated prior to 2003 may still be adjusted upon examination by the IRS if they either have been or will be used in a future period.

     The Company’s continuing practice is to recognize interest and penalties related to income tax matters in income tax expense. As of January 3, 2007, the Company had approximately $226,000 accrued for interest and penalties.

     New Accounting Standards— In September 2006, the FASB issued SFAS No. 157 (“SFAS 157”),Fair Value Measurements. In addition to defining fair value, SFAS 157 provides a framework for the measurement of fair value and expands disclosure requirements about fair value measurements. SFAS No. 157 will be effective for fiscal years beginning after November 15, 2007. The Company has yet to evaluate the impact of SFAS No. 157 on its financial statements.

     In February 2007, the FASB issued No. SFAS 159 (“SFAS 159”),Fair Value Option for Financial Assets and Financial Liabilities Including an amendment of FASB Statement No. 115(“SFAS 159”), which permits entities to choose to measure many financial instruments and certain other items at fair value. The provisions of SFAS 159 will be effective for fiscal years beginning after November 15, 2007. The Company has yet to evaluate the impact of SFAS No. 159 on its financial statements.

3. COMMITMENTS AND CONTINGENCIES

     There are various claims and pending legal actions against or directly involving Centerplate that are incidental to the conduct of its business. It is the opinion of management, after considering a number of factors, including but not limited to the current status of any pending proceeding (including any settlement discussions), the views of retained counsel, the nature of the litigation, prior experience and the amounts that have been accrued for known contingencies, that the ultimate disposition of any of these pending proceedings or contingencies will not have a material adverse effect on our financial condition or results of operations.

4. DEMAND FOR REGISTRATION

     Under the Registration Rights Agreement, dated December 10, 2003, between the Company and the Initial Equity Investors (the “Registration Rights Agreement”), the Company agreed to file a

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registration statement and undertake a public offering of the remaining interests of the Initial Equity Investors in the Company upon written demand from the Initial Equity Investors. Pursuant to the Amended Stockholders Agreement with the Initial Equity Investors, the Company will issue up to approximately $14.4 million in subordinated notes in exchange for up to 1,543,179 shares of common stock to enable up to 2,517,818 IDSs to be sold on behalf of the Initial Equity Investors. The Company agreed to pay its own costs and all costs and expenses of the Initial Equity Investors in connection with such registration, except underwriting discounts and commissions applicable to the securities sold. In fiscal 2006, the Initial Equity Investors renewed their demand for a registration under the Registration Rights Agreement. On March 23, 2007, the Company filed a registration statement on Form S-3 to register the sale of their interests with the Securities and Exchange Commission (“SEC”). In response to comments received from the SEC, the Company has filed two amendments to the Form S-3, dated May 7, 2007 and May 29, 2007. For the 26 weeks ending July 3, 2007, the Company has recorded approximately $333,000 in costs incurred in connection with this registration as transaction related expenses on the statement of operations. The Company is currently waiting for the Initial Equity Investors to resolve a remaining SEC comment regarding the Initial Equity Investors. The Form S-3 has not been declared effective.

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5. CONSOLIDATING CONDENSED INFORMATION

     The $105,245,000 original principal amount of Centerplate’s 13.5% subordinated notes are jointly and severally and fully and non-conditionally guaranteed by each of Centerplate’s direct and indirect 100% owned subsidiaries, except for certain non-100% owned U.S. subsidiaries and one non-U.S. subsidiary. The following table sets forth the consolidating condensed financial statements of Centerplate as of the period ended July 3, 2007 and January 2, 2007 (in the case of the balance sheet) and for the 13 and 26 week periods ended July 3, 2007 and July 4, 2006 (in the case of the statement of operations) and for the 26 week periods ended July 3, 2007 and July 4, 2006 (in the case of the statement of cash flows):

Consolidating Condensed Balance Sheet, July 3, 2007

				Guarantor			Non-guarantor
	Centerplate			Subsidiaries			Subsidiaries		Eliminations			Consolidated
	(In thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	212		$	30,074		$	4,127	$	—		$	34,413
Accounts receivable		—			25,824			2,285		—			28,109
Other current assets		38			43,947			1,926		—			45,911
Total current assets		250			99,845			8,338		—			108,433
Property and equipment, net		—			50,334			2,306		—			52,640
Contract rights, net		33			78,053			393		—			78,479
Cost in excess of net assets acquired		6,974			34,168			—		—			41,142
Intercompany receivable (payable)		105,803			(113,153	)		366		6,984			—
Investment in subsidiaries		(11,147	)		6,984			—		4,163			—
Other assets		8,368			50,209			1,066		—			59,643
Total assets	$	110,281		$	206,440		$	12,469	$	11,147		$	340,337
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIENCY)
Current liabilities	$	4,031		$	112,827		$	3,902	$	768		$	121,528
Long-term debt		105,245			104,006			—		—			209,251
Other liabilities		—			8,553			—		—			8,553
Total liabilities		109,276			225,386			3,902		768			339,332
Common stock with conversion option, par value $0.01 exchangeable for subordinated debt, net of discount		14,352			—			—		—			14,352
Stockholders’ equity (deficiency):
Common stock		400			—			—		—			400
Additional paid-in capital		218,331			—			—		—			218,331
Accumulated earnings (deficit)		(112,589	)		(18,946	)		7,116		11,830			(112,589	)
Treasury stock and other		(119,489	)		—			1,451		(1,451	)		(119,489	)
Total stockholders’ equity (deficiency)		(13,347	)		(18,946	)		8,567		10,379			(13,347	)
Total liabilities and stockholders’ equity (deficiency)	$	110,281		$	206,440		$	12,469	$	11,147		$	340,337

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Consolidating Condensed Statement of Operations and Comprehensive Income (Loss)

Thirteen Week Period Ended July 3, 2007

				Guarantor			Non-guarantor
	Centerplate			Subsidiaries			Subsidiaries			Eliminations			Consolidated
	(In thousands)
Net sales	$	—		$	188,121		$	12,718		$	—		$	200,839
Cost of sales (excluding depreciation & amortization)		—			152,259			10,595			94			162,948
Selling, general, and administrative		612			18,051			1,498			—			20,161
Depreciation and amortization		6			7,365			342			—			7,713
Transaction related expenses		333			—			—			—			333
Operating income (loss)		(951	)		10,446			283			(94	)		9,684
Interest expense		3,260			3,797			22			—			7,079
Intercompany interest, net		(3,925	)		3,925			—			—			—
Other income		(3	)		(508	)		(31	)		—			(542	)
Income (loss) before income taxes		(283	)		3,232			292			(94	)		3,147
Income tax provision (benefit)		(80	)		846			141			—			907
Equity in earnings (loss) of subsidiaries		2,443			57			—			(2,500	)		—
Net income (loss)		2,240			2,443			151			(2,594	)		2,240
Other comprehensive income — foreign currency translation adjustment		—			—			636			—			636
Comprehensive income (loss)	$	2,240		$	2,443		$	787		$	(2,594	)	$	2,876

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Consolidating Condensed Statement of Operations and Comprehensive Income (Loss)

Twenty-six Week Period Ended July 3, 2007

				Guarantor			Non-guarantor
	Centerplate			Subsidiaries			Subsidiaries			Eliminations			Consolidated
	(In thousands)
Net sales	$	—		$	299,290		$	26,882		$	—		$	326,172
Cost of sales (excluding depreciation & amortization)		—			246,783			22,287			136			269,206
Selling, general, and administrative		1,035			33,447			2,879			—			37,361
Depreciation and amortization		21			14,391			683			—			15,095
Transaction related expenses		333			—			—			—			333
Operating income (loss)		(1,389	)		4,669			1,033			(136	)		4,177
Interest expense		7,818			7,265			48			—			15,131
Intercompany interest, net		(7,850	)		7,850			—			—			—
Other income		(2	)		(987	)		(55	)		—			(1,044	)
Income (loss) before income taxes		(1,355	)		(9,459	)		1,040			(136	)		(9,910	)
Income tax provision (benefit)		(436	)		(3,952	)		286			—			(4,102	)
Equity in earnings (loss) of subsidiaries		(4,889	)		618			—			4,271			—
Net income (loss)		(5,808	)		(4,889	)		754			4,135			(5,808	)
Other comprehensive income — foreign currency translation adjustment		—			—			710			—			710
Comprehensive income (loss)	$	(5,808	)	$	(4,889	)	$	1,464		$	4,135		$	(5,098	)

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Consolidating Condensed Statement of Cash Flows

Twenty-six Week Period Ended July 3, 2007

				Guarantor			Non-guarantor
	Centerplate			Subsidiaries			Subsidiaries			Consolidated
	(In thousands)
Cash Flows Provided by (Used in) Operating Activities	$	(2,139	)	$	16,954		$	1,910		$	16,725
Cash Flows from Investing Activities:
Purchase of property and equipment		—			(7,735	)		(375	)		(8,110	)
Proceeds from sale of property and equipment		—			17			—			17
Contract rights acquired		—			(4,043	)		—			(4,043	)
Restricted Cash		—			849			—			849
Net cash used in investing activities		—			(10,912	)		(375	)		(11,287	)
Cash Flows from Financing Activities:
Repayments — revolving loans		—			(41,000	)		—			(41,000	)
Borrowings — revolving loans		—			38,500			—			38,500
Principal payments on long-term debt		—			(538	)		—			(538	)
Dividend payments		(8,920	)		—			—			(8,920	)
Increase in bank overdrafts		—			1,342			—			1,342
Change in intercompany, net		11,061			(10,903	)		(158	)		—
Net cash provided by (used in) financing activities		2,141			(12,599	)		(158	)		(10,616	)
Increase (decrease) in cash		2			(6,557	)		1,377			(5,178	)
Cash and cash equivalents — beginning of period		210			36,631			2,750			39,591
Cash and cash equivalents — end of period	$	212		$	30,074		$	4,127		$	34,413

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Consolidating Condensed Balance Sheet, January 2, 2007

				Combined			Combined
				Guarantor			Non-guarantor
	Centerplate			Subsidiaries			Subsidiaries		Eliminations			Consolidated
	(In thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	210		$	36,631		$	2,750	$	—		$	39,591
Accounts receivable		—			21,780			1,392		—			23,172
Other current assets		24			37,923			1,484		—			39,431
Total current assets		234			96,334			5,626		—			102,194
Property and equipment		—			48,295			2,389		—			50,684
Contract rights, net		54			78,699			456		—			79,209
Cost in excess of net assets acquired, net		6,974			34,168			—					41,142
Intercompany receivable (payable)		116,286			(122,640	)		208		6,146			—
Investment in subsidiaries		(6,390	)		6,146			—		244			—
Other assets		8,533			49,818			790		—			59,141
Total assets	$	125,691		$	190,820		$	9,469	$	6,390		$	332,370
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIENCY)
Current liabilities	$	4,844		$	90,858		$	2,230	$	768		$	98,700
Long-term debt		105,245			104,544			—		—	��		209,789
Other liabilities		—			8,279			—		—			8,279
Total liabilities		110,089			203,681			2,230		768			316,768
Common stock with conversion option, par value $0.01 exchangeable for subordinated debt, net of discount		14,352			—			—		—			14,352
Stockholders’ equity (deficiency):
Common stock		400			—			—		—			400
Additional paid-in capital		218,331			—			—		—			218,331
Accumulated deficit		(97,282	)		(12,861	)		6,498		6,363			(97,282	)
Treasury stock and other		(120,199	)		—			741		(741	)		(120,199	)
Total stockholders’ equity (deficiency)		1,250			(12,861	)		7,239		5,622			1,250
Total liabilities and stockholders’ equity (deficiency)	$	125,691		$	190,820		$	9,469	$	6,390		$	332,370

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Consolidating Condensed Statement of Operations and Comprehensive Income (Loss)

Thirteen Week Period Ended July 4, 2006

				Guarantor			Non-guarantor
	Centerplate			Subsidiaries			Subsidiaries		Eliminations			Consolidated
	(In thousands)
Net sales	$	—		$	177,461		$	13,238	$	—		$	190,699
Cost of sales (excluding depreciation & amortization)		—			143,445			10,567		162			154,174
Selling, general, and administrative		438			15,701			1,274		—			17,413
Depreciation and amortization		24			6,705			345		—			7,074
Contract related losses		—			—			—		—			—
Operating income (loss)		(462	)		11,610			1,052		(162	)		12,038
Interest expense		3,278			2,929			—		—			6,207
Intercompany interest, net		(3,925	)		3,925			—		—			—
Other income, net		(1	)		(367	)		27		—			(341	)
Income before income taxes		186			5,123			1,025		(162	)		6,172
Income tax provision		135			6,103			—		—			6,238
Equity in earnings (loss) of subsidiaries		(117	)		863			—		(746	)		—
Net income (loss)		(66	)		(117	)		1,025		(908	)		(66	)
Other comprehensive income — foreign currency translation adjustment		—			—			308		—			308
Comprehensive income (loss)	$	(66	)	$	(117	)	$	1,333	$	(908	)	$	242

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Consolidating Condensed Statement of Operations and Comprehensive Income (Loss)

Twenty-six Week Period Ended July 4, 2006

				Guarantor			Non-guarantor
	Centerplate			Subsidiaries			Subsidiaries		Eliminations			Consolidated
	(In thousands)
Net sales	$	—		$	279,264		$	24,940	$	—		$	304,204
Cost of sales (excluding depreciation & amortization)		—			229,307			20,381		146			249,834
Selling, general, and administrative		1,094			28,607			2,395		—			32,096
Depreciation and amortization		48			13,392			685		—			14,125
Contract related losses		—			100			—		—			100
Operating income (loss)		(1,142	)		7,858			1,479		(146	)		8,049
Interest expense		6,919			5,827			—		—			12,746
Intercompany interest, net		(7,850	)		7,850			—		—			—
Other income, net		(3	)		(679	)		19		—			(663	)
Income (loss) before income taxes		(208	)		(5,140	)		1,460		(146	)		(4,034	)
Income tax provision (benefit)		(15	)		1,645								1,630
Equity in earnings (loss) of subsidiaries		(5,471	)		1,314			—		4,157			—
Net income (loss)		(5,664	)		(5,471	)		1,460		4,011			(5,664	)
Other comprehensive income — foreign currency translation adjustment		—			—			313		—			313
Comprehensive income (loss)	$	(5,664	)	$	(5,471	)	$	1,773	$	4,011		$	(5,351	)

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Consolidating Condensed Statement of Cash Flows

Twenty-six Week Period Ended July 4, 2006

				Guarantor			Non-guarantor
	Centerplate			Subsidiaries			Subsidiaries			Consolidated
	(In thousands)
Cash Flows Provided by (Used in) Operating Activities	$	(271	)	$	27,302		$	4,057		$	31,088
Cash Flows from Investing Activities:
Purchase of property and equipment		—			(4,773	)		(60	)		(4,833	)
Proceeds from sale of property and equipment		—			165			—			165
Contract rights acquired		—			(6,818	)		—			(6,818	)
Return of unamortized capital investment		—			1,828			—			1,828
Net cash used in investing activities		—			(9,598	)		(60	)		(9,658	)
Cash Flows from Financing Activities:
Repayments — revolving loans		—			(5,000	)		—			(5,000	)
Borrowings — revolving loans		—			5,000			—			5,000
Net borrowings — swingline loans		—			—			—			—
Principal payments on long-term debt		—			(538	)		—			(538	)
Dividend payments		(8,920	)		—			—			(8,920	)
Increase in bank overdrafts		—			1,716			—			1,716
Change in intercompany, net		9,195			(5,761	)		(3,434	)		—
Net cash provided by (used in) financing activities		275			(4,583	)		(3,434	)		(7,742	)
Increase in cash		4			13,121			563			13,688
Cash and cash equivalents — beginning of period		199			39,612			1,599			41,410
Cash and cash equivalents — end of period	$	203		$	52,733		$	2,162		$	55,098

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

     The following discussion and analysis of our results of operations and financial condition for the 13 weeks ended July 3, 2007 and July 4, 2006 should be read in conjunction with our audited financial statements, including the related notes, included in our annual report on Form 10-K for the year ended January 2, 2007. The financial data has been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”).

Overview

     We are a leading provider of food and related services, including concessions, catering and merchandise services in sports facilities, convention centers and other entertainment facilities. As a part of our food services business, we also provide facility management services for a small number of accounts. We operate throughout the United States and in Canada. Based on the number of facilities served, we are one of the largest providers of food and beverage services to a variety of recreational facilities in the United States.

     We believe that the ability to retain existing accounts and to win new accounts are key factors in maintaining and growing our net sales. Net sales historically have also increased when there has been an increase in the number of events or attendance at our sports facilities particularly in connection with major league sports post-season playoff games. Net sales also have increased as a result of more events at our convention centers and entertainment venues. These higher sales, along with our ability to control product and labor costs, and our ability to increase per capita spending are primary drivers of earnings before interest, taxes, depreciation, and amortization (“EBITDA”) and net income growth.

     When renewing an existing contract or securing a new contract, we often have to make a capital investment in our client’s facility and offer to pay the client a percentage of the net sales or profits in the form of a commission. We reinvest the cash flow generated by operating activities in order to renew or obtain contracts. We believe that these investments have provided a diversified account base of exclusive, long-term contracts.

     We continue to make progress on our four strategic initiatives — culinary excellence, unique branded concepts, speed of service, and facility design — which allow us to differentiate ourselves in the market and ultimately help strengthen our financial position by operating more efficiently.

Critical Accounting Policies

     Our critical accounting policies are those that require significant judgment. There have been no material changes to the critical accounting policies previously reported in our Annual Report on Form 10-K for the year ended January 2, 2007.

Seasonality and Quarterly Results

     Our net sales and operating results have varied, and are expected to continue to vary, from quarter to quarter (a quarter is comprised of 13 or 14 weeks), as a result of factors which include:

• seasonality and variations in scheduling of sporting and other events;

• unpredictability in the number, timing and type of new contracts;

• timing of contract expirations and special events; and

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• level of attendance at the facilities which we serve.

     Business at the principal types of facilities we serve is seasonal in nature. Major League Baseball (“MLB”) and minor league baseball related sales are concentrated in the second and third quarters, the majority of National Football League (“NFL”) related activity occurs in the fourth quarter, and convention centers and arenas generally host fewer events during the summer months. Results of operations for any particular quarter may not be indicative of results of operations for future periods.

     In addition, our need for capital varies significantly from quarter to quarter based on the timing of contract renewals and the contract bidding process.

     Set forth below are comparative net sales by quarter (in thousands) for the first and second quarters of 2007, fiscal 2006, and fiscal 2005:

	2007		2006		2005
1st Quarter	$	125,333	$	113,505	$	107,220
2nd Quarter	$	200,839	$	190,699	$	182,071
3rd Quarter		—	$	218,929	$	208,619
4th Quarter		—	$	157,929	$	145,202

Results of Operations

Thirteen Weeks Ended July 3, 2007 Compared to the 13 Weeks Ended July 4, 2006

     Net sales —Net sales of $200.8 million for the 13 weeks ended July 3, 2007 increased $10.1 million, or approximately 5.3%, from $190.7 million in the prior year period. The increase was primarily due to higher sales at our MLB and minor league baseball facilities, convention centers and new accounts. MLB sales improved $4.5 million compared to prior year period due primarily to an increase in attendance and per capita spending at a number of our MLB facilities. Sales at the company’s minor league baseball accounts were up $2.6 million mainly due to 19 additional games played during the period. Convention center sales increased $2.5 million primarily due to an increase in the number of events at some of our facilities. In addition, sales at our NFL facilities increased $1.7 million due chiefly to the re-opening of the Louisiana Superdome, which was closed for renovations during the prior year period. Sales at our new accounts increased approximately $3.5 million primarily due to the addition of a spring training facility and four minor league baseball accounts. Partially offsetting these improvements was the termination of some of our contracts which accounted for a decline in sales of $3.7 million.

     Cost of sales –Cost of sales of $162.9 million for the 13 weeks ended July 3, 2007 increased approximately $8.8 million from $154.2 million in the prior year period due in part to the higher sales volume. As a percentage of net sales, cost of sales increased by approximately 0.3% from the prior year period. The increase was the result of higher product costs at our sports and convention center facilities. The increase was partially offset by lower labor and commission costs, predominantly at our MLB and minor league baseball facilities.

     Selling, general and administrative expenses –Selling, general and administrative expenses were $20.2 million in the 13 weeks ended July 3, 2007 as compared to $17.4 million in the prior year period, an increase of approximately $2.7 million. As a percentage of net sales, selling, general and administrative costs increased approximately 0.9% from the prior year period. The increase was primarily due to expenses associated with building our strategic platform including higher outside

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professional expenses such as legal fees and higher compensation and benefits expense primarily related to the addition of corporate management personnel. Also contributing to the increase in selling, general and administrative costs were higher other operating expenses from an increase in credit card fees related to the installation and upgrade of credit card capabilities at certain venues.

     Depreciation and amortization– Depreciation and amortization was $7.7 million for the 13 weeks ended July 3, 2007, compared to $7.1 million in the prior year period. The increase was principally attributable to depreciation and amortization related to capital expenditures associated with account renewals, primarily at our NFL facilities and convention centers, and investments in newly acquired contracts.

     Transaction related expenses– $0.3 million in expenses were incurred in the 13 weeks ended July 3, 2007 in connection with the follow-on offering to the Company’s 2003 initial public offering (see Note 4, Demand for Registration, in our Notes to the Consolidated Condensed Financial Statements).

     Interest expense –Interest expense was $7.1 million for the thirteen weeks ended July 3, 2007, compared to $6.2 million in the prior year period. The increase was principally attributable to an increase in interest expense associated with higher outstanding revolver borrowings under our credit facility in the current period to finance capital expenditures and working capital requirements.

     Other income– Other income consisting of interest income was $0.5 million in the 13 weeks ended July 3, 2007 as compared to $0.3 million in the prior year period. The increase was principally attributable to interest generated from higher cash balances, including restricted accounts, in the current period.

     Income taxes–Income taxes for the 13 weeks ended July 3, 2007 and July 4, 2006 were calculated using the projected annual effective tax rate (“ETR”) for fiscal 2007 and 2006, respectively, in accordance with Accounting Principles Board Opinion No. 28,Interim Financial Reporting(APB 28), and FASB Interpretation No. 18,Accounting for Income Taxes in Interim Periods - - an interpretation of APB Opinion No. 28(FIN 18). We estimate that in the fiscal year ending January 1, 2008, we will have an annual ETR of approximately -43%. In the prior year period, we estimated that our annual ETR for the fiscal year ended January 2, 2007 would be -40%. The fluctuation in the projected effective annual tax rate is primarily due to the sensitivity of the ratio involving expected ordinary income and permanent items (primarily the interest charge related to the Company’s derivatives). (See Note 2, Income Taxes section, to the Notes to the Consolidated Condensed Financial Statements for a more detailed discussion.)

     Our actual ETR for the 13 weeks ended July 3, 2007 was 23%. This is the result of a change in our projected annual ETR for fiscal 2007 from the rate calculated at the end of first quarter 2007. Our projected annual ETR at the end of first quarter was -40%. Our annual ETR is revised, as of the end of each successive interim period during the fiscal year to our current best estimate, in accordance with APB 28. The resulting tax expense recorded for the 13 weeks ended July 3, 2007 is a product of applying our revised annual ETR to our year to date ordinary income. The fluctuation of the ETR calculated as of the end of first quarter 2007 of -40% and the revised annual projected ETR as of the end of second quarter 2007 of -43% as applied to our year to date ordinary income results in the second quarter cumulative adjustment to income tax expense/(benefit).

     Our annual ETR is revised as of the end of each quarter, in accordance with APB Opinion No. 28. As a result, the interim income tax provision (or benefit) can fluctuate due to many factors, including changes in the projected book income, fluctuations in the valuation of our derivative, permanent tax adjustments, and tax credits. The annual effective tax rate is revised at the end of each successive interim period during the fiscal year to our current best estimate in accordance with APB 28.

Twenty-six Weeks Ended July 3 2007 Compared to the 26 Weeks Ended July 4, 2006

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     Net sales —Net sales of $326.2 million for the 26 weeks ended July 3, 2007 increased $22.0 million, or approximately 7.2%, from $304.2 million in the prior year period. The increase was primarily due to higher sales at our NFL, MLB, and convention center facilities of $7.6 million, $6.0 million, and $6.3 million, respectively. The increase in NFL sales was primarily due to the re-opening of the Louisiana Superdome, which was closed for renovations during the prior year period, and the 2007 BCS Championship Game and Fiesta Bowl held at the University of Phoenix Stadium. MLB sales increased as a result of an increase in attendance and per capita spending at a number of our facilities. Sales at convention centers increased due to the number and size of events in the current period. In addition, new accounts contributed $7.6 million and sales at all other facilities increased $1.4 million. Partially offsetting these improvements was the termination of some of our contracts which accounted for a decline in sales of $6.9 million.

     Cost of sales –Cost of sales of $269.2 million for the 26 weeks ended April 3, 2007 increased approximately $19.4 million from $249.8 million in the prior year period due in part to the higher sales volume. As a percentage of net sales, cost of sales increased by approximately 0.4% from the prior year period. The increase was the result of higher product costs at our sports and convention center facilities. The increase was partially offset by lower labor and commission costs, predominantly at our NFL and MLB facilities attributable in part to the higher sales volume.

     Selling, general and administrative expenses –Selling, general and administrative expenses were $37.4 million in the 26 weeks ended April 3, 2007 as compared to $32.1 million in the prior year period, an increase of approximately $5.3 million. As a percentage of net sales, selling, general and administrative costs increased approximately 0.9% from the prior year period. The increase was due to expenses associated with building our strategic platform including higher outside professional expenses such as legal fees and higher compensation and benefits expense primarily related to the addition of corporate management personnel. Also contributing to the increase were higher other operating costs at our facilities notably as a result of opening expenses associated with new accounts and also the re-opening of the Louisiana Superdome. In addition, higher credit card fees during the current year period related to the installation and upgrade of credit card capabilities at certain facilities also contributed to the increase in selling, general and administrative costs.

     Depreciation and amortization– Depreciation and amortization was $15.1 million for the 26 weeks ended July 3, 2007, compared to $14.1 million in the prior year period. The increase was principally attributable to depreciation and amortization related to capital expenditures associated with account renewals, notably at our NFL facilities and convention centers, and investments in newly acquired contracts.

     Transaction related expenses– $0.3 million in expenses were incurred in the 26 weeks ended July 3, 2007 in connection with the follow-on offering to the Company’s 2003 initial public offering (see Note 4, Demand for Registration, in our Notes to the Consolidated Condensed Financial Statements).

     Contract Related Losses– In the prior year period, a non-cash charge of $0.1 million was taken for the write-off of certain assets associated with a terminated contract.

     Interest expense –Interest expense was $15.1 million for the 26 weeks ended July 3, 2007, compared to $12.7 million in the prior year period. The increase was primarily attributable to higher interest of $1.3 million associated with higher outstanding revolver borrowings under our credit facility in the current period to finance capital expenditures and working capital requirements, and an increase in interest rates associated with our term loan. In addition, the current year period reflected a $0.1 million non-cash charge related to the change in the fair value of our derivatives as compared to a credit of $0.9 million in the prior year period, which resulted in a $1.0 million increase in interest expense.

     Other income– Other income consisting of interest income was $1.0 million in the 26 weeks ended July 3, 2007 as compared to $0.7 million in the prior year period. The increase was principally

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attributable to interest generated from higher cash balances, including restricted cash, in the current period.

     Income taxes–Income taxes for the 26 weeks ended July 3, 2007 and July 4, 2006 were calculated using the projected annual ETR for fiscal 2007 and 2006, respectively, in accordance with SFAS No. 109 “Accounting for Income Taxes”. We currently estimate that in the fiscal year ending January 1, 2008, we will have an annual ETR of approximately -43%. In the prior year period, we estimated that our annual ETR for the fiscal year ended January 2, 2007 would be -40 %. The fluctuation in the projected effective annual tax rate is primarily due to the sensitivity of the ratio involving expected ordinary income and permanent items (primarily the interest charge related to the Company’s derivatives). For the 26 weeks ended July 3, 2007, the projected annual ETR of -43% was not utilized to record the Company’s tax benefit for the period, due to the limitation applicable pursuant to the guidance provided by FIN 18 “Accounting for Income Taxes In Interim Periods” (an interpretation of APB No. 28). Our annual ETR is revised as of the end of each quarter, in accordance with APB Opinion No. 28. As a result, the interim income tax provision (or benefit) can fluctuate due to many factors, including changes in the projected book income, fluctuations in the valuation of our derivative, permanent tax adjustments, and tax credits. The annual ETR is revised at the end of each successive interim period during the fiscal year to our current best estimate in accordance with APB 28.

Liquidity and Capital Resources

     Net cash provided by operating activities was $16.7 million for the 26 weeks ended July 3, 2007, compared to $31.1 million in the prior year period. The increase was primarily due to higher operating losses, as discussed above, and fluctuations in working capital, which varies from quarter to quarter as a result of the timing and number of events at the facilities we serve.

     Net cash used in investing activities was $11.3 million for the 26 weeks ended July 3, 2007, as compared to $9.7 million in the prior year period. The increase of $1.6 million is principally attributable to the non-recurrence of the return of unamortized investment of $1.8 million from a terminated contract in the prior year period.

     Net cash used in financing activities was $10.6 million in the 26 weeks ended July 3, 2007 as compared to $7.7 million in the prior year period. The increase was due to the net repayment of $2.5 million in revolver borrowings under our credit facility in the 2007 period.

     We are also often required to obtain performance bonds, bid bonds or letters of credit to secure our contractual obligations. As of July 3, 2007, we had requirements outstanding for performance bonds and letters of credit of $18.2 million and $21.1 million, respectively. Under the credit facility, we have an aggregate of $35.0 million available for letters of credit, subject to an overall borrowing limit of $107.5 million. As of July 3, 2007, we had approximately $73.9 million available to be borrowed under the revolving portion of the credit facility. At that date, there were $12.5 million in outstanding borrowings and $21.1 million of outstanding, undrawn letters of credit reducing availability.

     We believe that cash flow from operating activities, together with borrowings available under the revolving portion of the credit facility, will be sufficient to fund our currently anticipated capital investment requirements, interest, dividend payments and working capital requirements. In fiscal 2007, contracts representing 18.7% of our 2006 net sales, or $127.5 million, are up for renewal. We expect to spend $20.0 million to $25.0 million in maintenance capital expenditures, which also includes capital expenditure commitments associated with contracts renewed and/or acquired in 2006. In addition, we are anticipating growth capital expenditures in the range of $15.0 million to $20.0 million. As a result of the anticipated capital expenditures, our borrowings may increase in the second half of 2007.

     In addition, while the declaration of dividends is at the sole discretion of our board of directors, we expect to pay dividends on our common stock at the same rate as fiscal 2006 (approximately $17.8 million, of which $8.9 million was paid as of July 3, 2007).

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New Accounting Standards

     See New Accounting Standards section of Note 2 in the Notes to the Consolidated Condensed Financial Statements for a summary of new accounting standards.

Cautionary Statement Regarding Forward-looking Statements

     Some of the statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere in this Quarterly Report on Form 10-Q may be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements reflect our current views with respect to future events and financial performance. These statements may include the words “expect,” “intend,” “plan,” “believe,” “project,” “anticipate” and similar statements of a future or forward-looking nature.

     All forward-looking statements address matters that involve risks and uncertainties that could cause actual results to differ materially from those indicated in these statements or that could adversely affect the holders of our securities. Some of these risks and uncertainties are discussed under “Risk Factors” in our Annual Report on Form 10-K for the year ended January 2, 2007.

     Any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

     Interest rate risk –We are exposed to interest rate volatility with regard to our revolving credit facility borrowings and term loan. As of July 3, 2007, we had $12.5 million in outstanding borrowings under the revolving portion of our credit facility and a $105.1 million balance on our term loan. A change in interest rate of one percent on these borrowings would cause a change in the annual interest expense of $1.2 million. In order to minimize our exposure to interest rate risk, during fiscal 2006, we entered into a one year interest rate cap agreement for a notional amount of $100 million designed to offset our risk in the event that LIBOR exceeds 6.3% per annum. While our subordinated notes are fixed interest-rate debt obligations, fluctuating interest rates could result in material changes to the fair values of the embedded derivatives in our IDSs.

     Market risk –Changing market conditions that influence stock prices could have an impact on the value of our liability for derivatives. As of July 3, 2007, a charge of $0.1 million has been recorded to our consolidated statement of operations to record changes in the fair value of our derivatives. A $1.00 fluctuation in the price of our IDS units would result in an approximate $0.3 million to $0.4 million change in our liability for derivatives.

     As of July 3, 2007, there have been no material changes, except as discussed above, in the quantitative and qualitative disclosures about market risk from the information presented in our Form 10-K for the year ended January 2, 2007.

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Item 4. Controls and Procedures.

     Evaluation of disclosure controls and procedures.

     We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Our management, with the participation of the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of July 3, 2007. Based upon that evaluation and subject to the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that the design and operation of our disclosure controls and procedures provided reasonable assurance that the disclosure controls and procedures are effective to accomplish their objectives.

     During the period covered by this report there have been no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

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PART II
OTHER INFORMATION

Item 1. – Legal Proceedings

     See Note 3 in the Notes to the Consolidated Condensed Financial Statements.

Item 1A. – Risk Factors

     There has been no material change to the disclosure in our Annual Report on Form 10-K for the fiscal year ended January 2, 2007; however, the following risk factor should be considered in addition to the risk factors included in the Annual Report.

     Future strategic transactions, such as acquisitions or joint ventures, may require significant resources or result in significant and unanticipated losses, costs or liabilities.

               In the course of our business, we continuously explore and evaluate opportunities to partner creatively with other companies in order to enhance our existing operating platforms, achieve operational efficiencies or expand our product offerings. We may seek to grow through strategic partnerships or other transactions, including acquisitions, which may be material. We may have difficulty financing any acquisition as a result of our capital structure. If we incur additional indebtedness to finance an acquisition, it could reduce our access to capital for other purposes and increase our debt service costs.

               Future strategic transactions, such as acquisitions or joint ventures, could entail a number of other risks, including, without limitation, difficulties in integrating operations, unfamiliarity with new areas of business, increased operating costs, exposure to unanticipated liabilities, regulatory risks and diversion of management’s attention from operating our business.

Item 4. – Submission of Matters to a Vote of Securities Holders

     The 2007 Annual Meeting of Security Holders was held on May 23, 2007. At the meeting seven directors of the Company were elected and our security holders ratified the appointment of Deloitte & Touche LLP as our independent registered accounting firm for the fiscal year ending January 3, 2008.

     1. The security holders elected the following directors to serve until the next annual meeting of security holders or until their successors are duly elected and qualified:

Name of Director	Number of Shares Voted For		Number of Shares Withheld
David M. Williams		19,879,354		177,088
Janet L. Steinmayer		19,907,718		148,724
Felix P. Chee		19,914,504		141,938
Sue Ling Gin		19,903,693		152,749
Alfred Poe		19,913,092		143,350
Peter F. Wallace		19,904,211		152,231
Glenn R. Zander		19,908,862		147,580

     2. The security holders ratified the appointment of Deloitte & Touche LLP:

Number of Shares Voted For	Number of Shares Withheld	Number of shares Abstained
19,936,304	72,307	47,831

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Item 6. Exhibits

(a)	Exhibits:
	31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes- Oxley Act of 2002.
	31.2	Certification of Interim Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	32.2	Certification of Interim Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on August 13, 2007.

Centerplate, Inc.
By:	/s/ Kevin F. McNamara
Name:	Kevin F. McNamara
Title:	Chief Financial Officer

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